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LSE introduces hidden orders; delays Baikal

09 November 2009

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The London Stock Exchange is to start letting traders place hidden orders in a bid to ward off competition from dark pools. Separately, press reports claim the bourse is delaying the launch of its own dark pool, Baikal, while it continues deal talks with rival platform Turquoise.

Hidden orders let traders place large orders but with only a fraction displayed at a time to minimise market movement.

According to the Financial Times, the LSE has told members that from 1 December, traders can place hidden orders to "enable customers to execute larger sized orders on the central order book, with the opportunity for mid-price execution".

The LSE is following the lead of Deutsche Börse, which introduced hidden orders in September, as it seeks to compete with a raft of dark pools, where the practice is common.

The technique has recently caught the attention of regulators concerned about market transparency. In the US last month, the SEC proposed to lower the trading volume threshold applicable for displaying best-priced orders in a particular stock from the current five per cent level to 0.25%.

Meanwhile, the LSE has delayed the introduction of its own dark pool, called Baikal, as it continues talks with Turquoise, according to Dow Jones newswire.

The exchange revealed last month that it is in discussions with Turquoise about a possible transaction. A deal could see Turquoise folded in with Baikal, prompting the LSE to hold off launching the dark pool this year.

According to Dow Jones, the exchange does not want to test Baikal with clients in case it then has to make changes after a possible Turquoise deal.

The bourse has also increased its hosting capacity fivefold by dedicating an entire floor of its central London data centre to clients wishing to host their servers there.

Exchange hosting, which the LSE introduced with an initial release of cabinets in September 2008, provides high frequency algorithmic trading firms with sub-millisecond access to markets, allowing them to physically locate their servers as close as possible to the exchange's matching engines.

It is another practice to have caught the eye of SEC chairman Mary Schapiro recently, who has asked for public comment and is worried that it offers "significant advantages" for traders who rely on speed.

David Lester, CIO, LSE, says: "Take-up of our hosting services has been strong among both new and existing clients, reflecting the demand for Exchange Hosting from algorithmic traders. Our Exchange Hosting clients are now generating nearly a fifth of the total volume traded on the order book on a daily basis, increasing liquidity and encouraging market efficiency."

In addition, the bourse is to start offering low latency market data from other exchange venues and MTFs to hosted clients via a feed from vendor QuantHouse.